There are many types of business loans available, however, the majority of them can be sorted into two categories
- Unsecured Loans
- Secured Loans
A simple way to tell which one you are choosing is to ask yourself: Is my loan being secured by either residential, commercial property or some type of asset.? If the answer is no, then a bank will consider this an unsecured loan.
Examples of unsecured loans are
- Lines of Credit
- Short Term Loans (under 3 years)
- Multi-Use Supply Chain Facilities
In addition, the following facilities might be described as unsecured, even where there are assets which could be considered to provide security to a lender. Assets such as equipment or stock being purchased, or debtors (money owed to the business) that are waiting to be paid.
- Debtor Finance
- Trade Finance
Another example of an unsecured loan is one that is used to make the purchase of a business. For example, the business is for sale for $1M. The purchaser has approx.. $600,000 in cash or property equity and wishes to borrow the remaining $400,000 from the bank based on the profit performance of the business.
This type of lending, which is available from some banks and subject to many conditions being met, would be ‘’unsecured’’ as it being provided against the cash-flows of the business itself, rather than against an asset. This can also apply to franchises, both existing and new.
While unsecured lending options have increased significantly in the past few years, (making it easier for businesses to obtain capital) the key is to know which bank or finance company is best at offering the facility that you need.
Secured loans take the form of any facility provided to your business where an asset is taken as collateral for the loan (security). This might be an residential property, a commercial property, a motor vehicle or other equipment.
Secured loans can be obtained to start new businesses, expand existing businesses or simply purchase the asset being used as security. A new business premises for example, or a piece of equipment (forklift, van, cold-room) to be utilised by the business.
Interest Rates are typically lower for secured loans due to their perceived lower risk.